China will steadily increase the issuance of urban construction investment bonds but will limit total local government debts at 100 percent of their revenues, the National Development and Reform Commission said on Monday.

 

Xu Lin, head of fiscal and financial department at the powerful economic planning agency, reaffirmed that China's local government debts are under control.

It's unnecessary to short urban construction investment bonds based on irrational judgment on China's local government bond risks, he told the official China Securities Journal in an interview, which was later published on the agency's website.

Urban construction investment bonds are China's quasi-municipal bonds. Chinese local governments are barred by law from issuing debt.

China reported local government debt of 10.7 trillion yuan as of the end of 2010 and the country issued 347.5 billion yuan of urban construction investment bonds in the five years to 2010.

The huge amount and their possible impact on the banking system and the broad economy has deeply concerned investors and weighed heavily on capital markets.

Xu said China had tightened restrictions since last year for local governments' financing vehicles to issue bonds, capping total debts to be in line with their revenues.

If the cumulative government debts exceeded the local total fiscal income, then no new issuance of urban construction investment bonds will be allowed, Xu said.

He added that China would steadily increase the size of issuance of the urban construction investment bonds to help build the country's infrastructure and boost economic growth, while also trying to make it easier for urban construction investment firms, Chinese local governments' major financing vehicles, to meet their demand for long-term and low-cost bonds.

There is a mismatch between the maturity and interest rate of urban construction investment bonds and their demand for long-term and low-cost financing, he said.